Dallas Going Green With Natural Gas

It was just reported that the Dallas Area Rapid Transit DART board (no pun intended) voted to solicit bids from firms able to supply nearly 600 new natural gas-powered buses. They cited falling natural gas prices as the reason they no longer think diesel buses are the best buy. The cost was estimated at $100 million, but they claim the fuel savings will offset the expense. Dallas Mayor Tom Leppert said that choosing natural gas over diesel would help brand Dallas as an environmentally friendly, forward-looking city.

Commentary – The US market for Natural gas-powered vehicles (NGV’s) is expected to remain dominated by fleet sales to government and commercial customers. The fuel is cheaper than gasoline/diesel and has substantially lower CO2 emissions and other pollutants. The current price for compressed natural gas (CNG) in the Dallas area is $1.95/gallon. In Oklahoma City the average price is $1.11 per gallon.

 

 

What’s Happening With Ethanol?

According to the Energy Information Administration (EIA) approximately 5 billion gallons of ethanol was produced in the U.S. in the first 6 months of 2009. The US also imported 79 million gallons of ethanol during this same period. Based on the first 6 months of production it is estimated that 10.5 billion gallons will be consumed in 2009. The imported volumes from Brazil and the Caribbean for 2009 are estimated to be 157 million gallons.

Current ethanol production capacity stands at 13 billion gallons. The idle production is a result of the financial crisis when some ethanol plants went into bankruptcy. The capacity is being put back into service as they come out of bankruptcy. Ethanol producers were squeezed by escalating corn prices and overcapacity as the industry overbuilt. In late 2008, most producers were at breakeven levels or worse as ethanol prices fell significantly in tandem with crude oil.

Commentary – The ethanol industry was created by the U.S. government by subsidizing it. They protected it from imports by putting tariffs on ethanol from Brazil and other countries. To create demand the government then mandated its use as an additive in gasoline and this triggered the rapid growth of the ethanol industry. In 2008, ethanol has displaced only 3% of our oil usage. The Obama Administration is pushing a big expansion in ethanol, including a mandate to increase the share of the corn-based fuel required in gasoline to 15% from 10%. Apparently no one in the Administration has read a pair of new studies, one from its own EPA, that expose ethanol as a bad deal for consumers with little environmental benefit. A second study — by the Environmental Protection Agency’s Office of Transportation and Air Quality — explains that the reduction in CO2 emissions from burning ethanol are minimal and maybe negative. The government has put a maximum on the amount of ethanol that can be produced from corn at 15 billion gallons. All ethanol is made by the fermentation of corn. To meet the new mandated volumes of 36 billion gallons by 2022 without exceeding the 15 billion gallons of corn-based ethanol, the ethanol industry will be challenged to commercialize cellulosic ethanol technology.

Are Gasoline Prices Going Higher?

The EIA says gasoline retailers and wholesalers account for about 13% of the total cost of gasoline. Refiners get another 7% and taxes eat up 16%. The remaining 64% is crude oil. Based on a price of $2.55 per gallon the breakdown is as follows: Crude oil – $1.63, Taxes – 41 cents, Refining - 18 cents and Distribution/Marketing – 33 cents.

From January 2003 to October 2009, oil prices have increased 125% while gasoline prices have risen 75% (Based on data from the Energy Information Administration). For the most part, the price increases for both crude oil and gasoline track reasonably well. But during the period September 2007 to October 2008 they started deviating with crude oil price increases accelerating faster than gasoline prices.  It appears that in the past 3 months crude oil prices and gasoline prices are starting to deviate again.

Commentary – I believe the explanation for the deviation in price increases was a result of decreased demand. Consumers cut back on their gasoline usage and the refiners and retail outlets responded by not increasing prices despite the fact that crude oil prices were still rising. This has been proven out by lower refiner profit margins. It appears that the deviation is starting again. Strictly based on the chart above it appears that we are either going to see crude prices decline or gasoline prices are going higher. Refining margins are already low, so this time I believe gasoline prices will go higher. If crude oil price increases continue, we may see $4.00 gasoline again.

Big Investments Needed in Natural Gas Infrastructure

According to a new study by the Interstate Natural Gas Association of America (INGAA) projected growth in North American natural gas supplies and market growth in the U.S. and Canada will require billions of dollars of additional investment in pipeline, storage and other midstream infrastructure through 2030. The study analyzed future natural gas infrastructure requirements under different market scenarios and came up with a range of investment from $133 to$210 billion over the next 20 years.These investments would be required to bring increased domestic natural gas production from unconventional shale basins and tight sands to the pipeline network.

By 2030, the U.S. and Canada will need approximately 29,000 to 62,000 miles of additional natural gas pipelines, 370 to 600 billion cubic feet (Bcf) of additional storage capacity, 6.6 to 11.6 million horsepower of new gas transmission pipeline compression, 20 to 38 Bcf per day of new natural gas processing capacity and 3.5 Bcf per day of new LNG import terminal capacity in order to meet market requirements. About three-fourths of the market growth occurs in the power sector. The growth rate of natural gas consumption in the electric generation sector is the predominant determinant of the growth rate of the entire natural gas market.  Electric load growth, timing and development of renewable generation technologies, clean coal with carbon capture and sequestration, and expansion of nuclear generation are areas of uncertainty.

Commentary - The study seems to rely heavily on the growth rate of natural gas use in electrical generation. I am assuming that this is due to the belief that natural gas fired power plants will replace coal-fired power plants in the future. They might want to check with the coal industry lobbies before they put to much faith in their study. If the study is accurate in its assumptions, these investments would create many new jobs within the natural gas industry and create many new opportunities for midstream pipeline companies

New Poll On Global Warming

A national survey was released this week by the Pew Research Center for the People & the Press. According to the survey, the number of Americans who believe there is solid evidence that the Earth is warming because of pollution is at its lowest point in three years. The poll of 1,500 adults found that only 57 percent believe there is strong scientific evidence that the Earth has gotten warmer and is attributed to humans. The poll’s results differ from previous surveys which have shown an overwhelming majority of Americans believe global warming is happening.

Commentary – These polling results show that the public is beginning to catch on to the scam Al Gore and his cohorts have been perpetuating. Maybe an informed citizenry will show their opposition to the carbon tax Congress is about to impose on a struggling economy.

El Paso Reenters Natural Gas Gathering & Processing Business

El Paso Corporation is an energy company, which operates in the natural gas transmission and exploration and production sectors of the energy industry. The Company owns or has interests in North America’s interstate pipeline system, which has approximately 42,000 miles of pipe that connect North America’s producing basins to its consuming markets. It also provides approximately 230 billion cubic feet (Bcf) of storage capacity and has a liquefied natural gas (LNG) receiving terminal and related facilities in Elba Island, Georgia.

The El Paso Corp. has decided to reenter the natural gas gathering and processing business to link its interstate pipelines with the new supplies of gas from Louisiana’s Haynesville Shale and other areas of growing natural gas production. El Paso said that it will form a new “midstream” segment that will acquire and possibly build facilities to treat gas after it is extracted from the wells and transport it to interstate pipelines. El Paso sold its remaining interests in gathering and processing assets in 2005 to affiliates of privately held EPCO Inc., a Houston company.

Commentary – Shale plays have attracted interest from pipeline companies and private investors. Analysts have said that El Paso could acquire gathering and processing assets connected to the Haynesville Shale and to the Eagle Ford Shale in Texas.

US Natural Gas Potential (Updated Study)

The Potential Gas Committee (PGC), an incorporated, nonprofit organization, consists of knowledgeable and highly experienced volunteer members who work in the natural gas exploration, production and transportation industries and in the field and technical services and consulting sectors. Although the Committee functions independently, the Potential Gas Agency at the Colorado School of Mines provides the Committee with guidance, technical assistance, training and administrative support, and assists in member recruitment. Every two years the PGC puts out their assessment of the potential natural gas resources of the United States.

In June of this year, the PGC released the results of its latest biennial assessment of the nation’s natural gas resources. The new 2008 PGC estimate of potential natural gas resources of 1,836 Trillion cubic feet (Tcf), is a 516 Tcf (or 39 percent) increase over their 2006 estimate. This is the highest resource evaluation in the Committee’s 44-year history. Most of the increase from the previous assessment arose from reevaluation of shale-gas plays in the Appalachian basin and in the Mid-Continent, Gulf Coast and Rocky Mountain areas. When the PGC’s results are combined with the U.S. Department of Energy’s latest available determination of proved gas reserves, 238 Tcf as of year-end 2007, the United States has a total available future supply of 2,074 Tcf, an increase of 542 Tcf over the previous evaluation.

Commentary -  Since I was a member of this Committee several years ago I can assure you that the committee does a creditable job in assessing our natural gas resources. If you dig deeper into their report you will find that Shale gas now comprises 616 Tcf or 34% of the potential gas resources. Dr. John B. Curtis, Professor of Geology and Geological Engineering at the Colorado School of Mines and Director of the Potential Gas Agency said “our present assessment demonstrates an exceptionally strong and optimistic gas supply picture for the nation.”

Canadian Oil Sands and the US Economy

The development of the Canadian oil sands could represent an economic boom for the United States creating more than 342,000 new (not saved) US jobs, according to a study by the Canadian Research Institute and commissioned by the American Petroleum Institute. The study entitled “Canada’s Oil Sands and Economic Impact on the USA”, said that more oil sands production could stimulate economic activity in both countries. With increased production and investment in oil sands, demand for US goods and services would add an estimated $34 billion to US gross domestic production in 2015 and $42 billion in 2025. The heaviest job growth in the US would take place during 2011-2015 when 342,000 new jobs would be created. These new jobs would cover a broad range of industries and sectors.

Oil sands reserves play an increasingly important role in the economic development of Alberta Canada and the United States. The study is based on the assumption that oil sands production would rise from the current 1.4 million b/d to around 4.0 million b/d in 2025. The study further estimated that about $25 billion in new investment would be required and $7 billion in annual operating costs in the peak year of 2015 would be needed to meet the oil sands output.

Commentary - The US relies heavily on about 2.1 million barrels of oil per day from Canada or about 23% of our total imported oil per day. The Canadian oil sands development is very important to the US economy in many ways. If this study is correct and the investments are made, the US economy could benefit greatly with the addition of new jobs. According to the study the benefits do not fall to just one industry but are broadly shared across many industrial sectors, especially the steel industry. I do have some concerns about the environmental impact of the oil sands, hopefully the environmental concerns will be addressed. The study did not address these concerns.

ExxonMobil Unlocks Gas Potential Of Colorado’s Piceance Basin

The Piceance Basin in northwest Colorado contains trillions of cubic feet of natural gas. ExxonMobil has been operating in the basin since the 1950’s, producing modest amounts of gas that was easy to recover. The majority of the natural gas is in scattered pockets deep underground in very dense rock. These “tight gas” deposits up to 16,000 feet deep have been known for decades, but have been too difficult and expensive to recover.

ExxonMobil engineers are using proprietary fracturing technologies to recover the gas and reduce environmental impact. Rio Blanco County is the home of ExxonMobil’s Piceance project. The project covers an area larger than 3,000 square miles and according to ExxonMobil holds a potential resource of more than 45 trillion cubic feet of gas. ExxonMobil uses a proprietary Fast Drill process and Multi-zone Stimulation technology to access up to 50 gas-bearing zones in one well. They can drill up to 9 to 10 wells from a single pad. Each well can recover gas located across 20 acres below ground.

ExxonMobil announced in June the completion of new field processing capacity at its Piceance Project. The new facilities have the capacity to handle up to 200 million cubic feet per day of natural gas. ExxonMobil is currently producing about 100 million cubic feet per day. Enterprise Products Partners LP constructed the new plant and pipeline facilities to provide compression and treating services for the produced natural gas.

Commentary – ExxonMobil has been running more than five drilling rigs for more than two years and as of July, they were running seven rigs despite the current low natural gas prices. ExxonMobil’s new facilities includes a system that collects and reuses water that is produced with the natural gas production, reducing the use of fresh water in the drilling and fracturing process by about 80%. The claims made by ExxonMobil as to the potential seem very optimistic. If you take 200 million cubic feet per day (the maximum for their facilities) and assume they produce the maximum for 40 years, you only recover about 3.0 trillion cubic feet of natural gas or only 7% of the potential. I am assuming that their estimate of 45 trillion cubic feet must include other areas or formations that are not currently being developed.

Are The Gas Shales Another Bubble About To Burst?

A recent article out of Denver reported that an analyst fears that the industry projections on shale gas maybe too optimistic. The AP reported that the promise of abundant new supplies of natural gas from discoveries of vast shale formations could be the next speculative bubble to burst. Arthur Berman, a Texas-based geological consultant claims that analyses show that gas shale fields in Texas and elsewhere aren’t as profitable and don’t likely contain as much recoverable gas as the industry and others claim. He added, that based on experience in the Barnett Shale in Texas he doesn’t expect the yields from these wells are high enough or last long enough to make the gas shales that profitable. He showed that the wells decline much faster than companies like to admit, and less than a third of the wells drilled will produce enough gas to break even. Berman said this during the Association for the Study of Peak Oil and Gas Conference in Denver. His view contrasts with that of other analysts and the industry who see natural gas as playing a key role in the face of concerns about declining oil supplies and climate change.

Commentary – I haven’t looked at the performance of the new shale wells nor the economics, but I believe it is too early to become concerned. The Barnett Shale is known as a “tight” gas reservoir. The gas is not easily extracted, even though the shale may have a lot of pores or porosity with the ability to store large quantities of gas, but it is not very permeable. In other words, it does not have many connections between the pores and so trapped oil and gas in the rock can not flow easily to a wellbore. The gas flows from high pressure back in the reservoir to the low pressure at the wellbore. The advances in horizontal drilling has allowed producers to drill horizontally and contact more rock with a horizontal wellbore than a vertical wellbore. It increases the area the well can drain. The advances in hydraulic fracturing technology have improved the performance of these wells. The hydraulic fractures created in the rock connect with natural fractures in the rock that contain gas and also create channels to the pores containing natural gas. These wells initially produce natural gas at high rates and decline in production rather rapidly. The fractures tend to deplete quickly and then are gradually replenished by natural gas from the “tight” or low permeability rock. However, these wells can produce at lower rates for long periods of time. Over time, the fractures and horizontal wellbores will accumulate sand and shale and tend to plug up resulting in drastic reduction in production. It is necessary at times to re-enter wells to clean out the wellbores. I believe technology and more experimentation will improve the performance of these shales. The gas shales developed recently have contributed significant amounts of natural gas, so much that we now have a surplus of natural gas resulting in a drastic reduction in natural gas prices. My recent report on gas storage revealed that gas storage is at its maximum capacity and some operators have natural gas wells either shut-in or have cut-back producing rates.